The impact of Brexit onclimate and energy policy

Richard S.J. TolUniversity of Sussex

Vrije Universiteit, AmsterdamTinbergen Institute

CESifo

Outline

• EU Emission Trading System

• Impact of ETSexit on EU

• Impact of ETSexit on UK– Costs

– Financial sector

– Regulations

• Nuclear power

• Interconnection

• Ireland

EU ETS

• Tradable emission permits– Regulator sets a cap on total emissions, issues

permits.

– Companies that want to emit more than allowed buy additional permits from companies that want to emit less.

– If market works well, all companies face the same emission reduction cost at the margin.

• The EU Emissions Trading System is the world’s largest emission permit market.

• ETS regulates some 45% of all greenhouse gas emissions in the EU, from some 11,000 installations.

EU ETS

• Started in 2005

• Now in Phase 3, from 2013 to 2020

• Emission permits are issued by Member States– Partly auctioned

– Partly grandparented

• Monitoring and enforcement by Member States

• Emission permits are valid in all of the EU.

• Permit do not have a country of origin.

• Emission permit gives the right to emit a tonne of carbon dioxide (or equivalent) at any time after January 1, 2013.

ETSexit

• The UK will leave the EU on March 30, 2019.

• Brexit means that the UK will leave the ECJ.

• ECJexit implies ETSexit.

• Not inevitable: Norway, Iceland, Liechtenstein are in the EU ETS.

• Swiss ETS is linked to EU ETS, overseen by PCA.

• If there is a transition agreement that keeps the UK in the ETS until the end of 2020, DG Climate Action will need to redo some of its preparatory work for Phase 4.

Impact on EU27

• Without a transition agreement …

• Total amount of permits will need to be adjusted downwards by some 270 mln tCO2, the UK allocation for 2019 and 2020.

• This is small relative to the 900 mln tCO2 of delayed permits that the EU plans to reinject into the market in 2019 and 2020.

• On 30 March 2019, EU will stop buying permits from the UK, and will need to declare that all permits in circulation are valid.

• Permit sale, emission and verification are not synchronous, so there will unvalidated permits.

Impact on EU27

• The UK is a net importer of permits.

• Permit price would fall.

• After the referendum, ETS price dropped by 20%, from €5.86 to €4.67/tCO2

Impact on EU27

• Increasing share of emission permits are auctioned.

• 90% of auction revenue goes to the Member State in which the buyer is incorporated.

• 10% goes to Eastern Europe.

• €150 million

• UK has been a green champion in the EU.

• Balance will shift to brown position of France, Poland.

• Weaker voice in international climate negotiations.

Impact on UK - ETS

• In 2013 (2014), 19% (25%) of emission reductions in the UK were met by imported permits.

• House of Commons has voted to maintain targets in Climate Change Act 2008.

• Clean Growth Strategy reaffirms this.

• Without permit imports, climate policy will be 40% more expensive.

• Climate policy cost 0.5% (CCC) to 0.9% (Lilley) of GDP in 2020.

• ETSexit alone will cost 0.2-0.4% of GDP by 2020.

Impact on UK - Finance

• City is heart of permit trade.

• In 2013, 1.7 billion permits were sold by UK companies.

• In 2013, UK emissions were 0.5 billion tCO2e.

• Permits do not have a country of origin, but the current permit owner does. The EU will have no choice but to close the door to UK companies selling permits.

Impact on UK - Regulation• Some 55% of UK emission reduction measure

originate in EU laws and regulations.

• The UK has 18 months to fix this.

• EU (Withdrawal) Bill will create a UK ETS, identical to EU ETS (but less liquid).

• The UK has a “carbon” tax.

• DECC has been folded into BEIS, which is losing people.

• BEIS has been silent on Brexit, also in Clean Growth Strategy.

• Committee on Climate Change:– UK would not import permits anyway.

– Policy implementation lags behind targets.

Impact on UK - EurAtom• UK climate policy has two additional planks:

nuclear and interconnection.

• Hinkley Point C (3.2 MW) and Sizewell C (1.6 MW) are only the start: 9 more units (14.2 MW) are foreseen (initially for 2030).

• Civilian use of nuclear power is regulated by EurAtom, which is overseen by the ECJ.

• Foreign companies would not be allowed to sell fuel, equipment or know-how to the UK until– regulations are non-proliferation compliant; and

– nuclear inspectorate has IAEA accreditation.

• Further delays: Hinkley C was announced in 2008 for 2018-9, now 2025-7

Impact on UK - interconnection• UK has 5 GW

interconnection, plans another 11 GW.

• Power markets are heavily regulated for capacity, frequency, reliability, environment, price, access.

Impact on UK - interconnection• Power markets are heavily regulated for

capacity, frequency, reliability, environment, price, access.

• A merchant interconnector buys power in one jurisdiction, sells in another … regulatory uncertainty doubled.

• UK policy has focussed on retail market (where the votes are), EU policy on wholesale market (where the problems are).

• Regulatory convergence and certainty has stimulated interest in interconnection – gone now.

Ireland• The Single

Electricity Market for generation and transmission started in 2007, overseen by EirGrid and SONI, and ECJ.

• Assets owned by Irish, US, British companies.

• SONI is NI gov’t.

Ireland• The Single Electricity Market will end if SONI

should be free of the ECJ.

• Northern Ireland would have a small* and, because of economies of scale in generation and reliability, expensive grid with severe market power in the wholesale market.

• Major costs imposed on Republic of Ireland, which relies on the UK for gas storage.

* 1.9 v 6.7 million people

Wrap-up• Brexit creates a few small problems in energy

and climate policy for the EU as a whole, but bigger problems for the Republic of Ireland.

• Brexit undermines three central planks of UK climate and energy policy, and destroys Northern Ireland energy policy.

• BEIS and CCC pretend there is no problem.